Australia, Syria Vie for World’s Worst-Performing Currency

The Australian dollar is slugging it out with the Syrian pound for the title of world’s worst-performing currency.

An Australian one-dollar coin.

Bloomberg News

Once the darling of FX traders, the Aussie dollar has been out of favor since April 12. According to National Australia Bank, the only global currency that’s more unloved in that period is from Syria where a civil war is waging. Even the currencies of Mauritania, Myanmar, Swaziland and Namibia have more friends.

For Aussie dollar bears, the currency’s fall has been a vindication.

Record foreign demand for the nation’s triple-A rated securities in recent years as Europe’s debt crisis raged had propelled the Aussie dollar to historic highs against its rivals. Surging direct investments also pushed the Aussie higher, prompting some investors to call it a safe-haven currency.

Not everyone was convinced. Some analysts were quick to point out the Aussie was only a minor reserve currency, backed by a country with a gaping current account deficit. In their view, the delinking of the currency’s historic correlation to commodity prices and global growth was only temporary.

The truth is probably somewhere in between. For sure, the Aussie isn’t a safe haven in the classic mold. But it has held up despite volatile commodity prices, record low domestic interest rates and slower growth in China, Australia’s biggest trading partner.

Traders say there are few signs that the big global reserve managers are cutting their Aussie holdings. Instead, the sell off has been driven by leveraged accounts and the collapse of key technical support levels, forcing the liquidation of bullish bets.

Support is expected from the relatively high yields on offer Down Under and the government’s triple-A stamp is unlikely to be lost anytime soon. Australia also continues to enjoy some of the world’ most benign economic conditions even as a once-in-a-century mining boom slows. Unemployment remains low at 5.5% and the economy, while patchy, is expected to grow around 2.5% this calendar year.

Still, analysts now feel the currency has entered a new, lower range against the greenback and is unlikely to test new highs UBSGoldman Sachs and Commonwealth Bank of Australia were among those downgrading their outlook in recent weeks.

While domestic developments will count, the real driver for fresh selling will be events offshore, especially in the U.S., said Nick Parsons, global co-head of FX strategy at National Australia Bank.

“Whilst we already have penciled in a US$1.00-US$0.9400 range until end-2014, we warn that the risks around this are asymmetrical and at great risk from stronger economic data in the United States and a resultant stronger US dollar,” Mr. Parsons said in a note.

For those betting on another Aussie dollar parity party, the wait could prove a long one.